Stock Starter Series, Part 1: Why Stocks?

Welcome to Part 1 of a 5-part series for the brand-new stock investor – or the person still thinking about it! My goal in this series is to try to simplify how to get started in this most exciting financial journey.

So let’s get right to it: with all the different things into which a person can invest some spare money, why do I think that you should make stocks your top choice?

To be clear, I’m very mindful of the very bad rap that stock investing has endured since the “crashes” of 2001 and 2008-09. As a novice investor myself during both, I could have blamed “the markets” or “the economy” or [insert scapegoat here]. Instead, I did with few do:  I decided to eat ‘humble pie,’ to admit that the money I lost was due entirely to my ignorance and not due to any evil or nefarious ‘forces’ that many (ignorant) people claim control the market.

Yes, some people and institutions indeed try to twist the market to their advantage and have sometimes found ignorant victims, but this is where education comes in:  education about the basics of how the market works will take away the fear, mystery, and misconceptions and thereby help you avoid most pitfalls. Also, you’ll be better able to “smell a rat.”

If there’s a moral to what I just wrote, it’s this: STOP BLAMING OTHERS for your financial situation and failures and instead take ownership of YOUR money by getting more educated. Okay, let’s move on.

Why I consider this ‘bad rap’ a tragedy is because Millennials especially have been scared away from the power of this incredible wealth-building vehicle.  This is because most have only ever heard about how Dad or Uncle Billy “lost their shirt,” especially following the one-two punch of the 2000’s.

If you’re a Millennial and you’re willing to get past these misconceptions, then learning the straight facts from investors like me could dramatically improve your long-term financial outlook. Specifically, if you can grasp and practice what I’m going to share while still in your twenties, you could be very well-off financially once you’re in your fifties. The longer you put it off, the less that the power of time can work in your favor.

What is a stock?

There are so many definitions and ways to explain this, but here’s my attempt. Basically, to become part-owner in a company (a business or corporation), you can buy pieces or “shares” of ownership in that company.  Once you own some shares, you now own some “stock” in that company.

When people say that they’re buying or selling “stocks,” what they really mean is that they’re buying and selling shares in that stock. Since your typical company has millions of shares, you need to be pretty wealthy to buy and sell entire companies in one shot. Warren Buffett is perhaps the most famous example of one person who can and does!

Can you buy shares in any company?  Private companies are not found on the stock market. For example, although I’d DEARLY love to buy shares in Lego, I can’t. It’s a company that has chosen to not be “listed” on any of the world’s stock exchanges.

What is a stock exchange?

It’s a place, a “market,” where people can exchange or trade stocks, i.e. buy and sell them, hence the term “stock market.”  Sort of like going to a local food market, but where you’re exchanging money for food.  Anyhow, companies who choose to be listed on an exchange are considered public, meaning that an ordinary person like you and I – the “public” – can trade shares in these companies, meaning they are “publicly traded.”

A company will often choose to list in order to raise money (“capital”) for growth or expansion. I suppose that companies like Lego have either never felt the need to raise extra capital and/or they don’t want the hassle of dealing with shareholders.  In any case, they’ve chosen to remain privately-owned.

The most famous stock exchange is found on New York City’s Wall Street, the New York Stock Exchange (NYSE). There’s also one on Bay Street in Toronto, Canada, the Toronto Stock Exchange (TSX).  Another American exchange, the NASDAQ, specializes in tech stocks.  Other famous exchanges are in London and Tokyo. There are many other mostly smaller ones across the globe.

How can you buy a stock?

You can’t just walk onto the trading floor of a stock exchange and place “bids” to buy or sell shares in a stock. You’re not an actual trader and so you need a go-between to place orders for trades. This can take the form of going through a local investment advisor or stock broker who places trade orders for you.  Or, you can open an online, self-directed investing account and place your own orders.

To find an advisor or broker, just go to your local bank or investment firm/brokerage where you can set up an appointment to see if that’s the right place to open an investing or trading account. As with finding a good doctor, dentist, or plumber, be sure to ask around for recommendations first and then shop around. If you can’t personally find someone to give a recommendation, then search for online reviews and recommendations.

Specifically, you need to find an advisor/broker who is more interested in just their commissions, but who really does want you to succeed in investing.  That is, you need to find one who realizes that their success is dependent upon your success.  This is where recommendations are very useful.  Anyhow, they do the homework and make the decisions. That’s what people pay them for.

You can also trade online by setting up a self-directed investing account and doing the homework and making the decisions yourself. This is the path that I chose back in 2006. I’m a Canadian and I highly recommend that fellow Canadians consider RBC Direct Investing because their trading fee structure is incredibly simple, often only $9.95 for one “trade,” i.e. buying or selling one or more shares of a stock.  Some people prefer online trading through platforms like E*TRADE, although I prefer the integrity and security of an established banking institution like RBC.

How much does one share cost?

As of this writing, a big-boy like Amazon (stock ticker symbol AMZN on the NASDAQ stock exchange) will cost you over $1,700 USD to buy one share!  I sure wish that I had thought of becoming an Amazon shareholder after first becoming a customer back in the mid 2000’s when it was less than $40 per share.  However, I was scared of stock investing back then following the Dot-Com crash of 2001.  Plus, I would have had to pay an expensive commission to my investing firm at the time.  But I didn’t totally miss the boat – I finally got in just over five years ago at just under $400 per share.  I’m not writing this to brag, but to give just one illustration of the incredible potential compounding power of being a stock investor!

If you’re discouraged at the thought of trying to scrounge up $1,700 for one share, don’t worry.  You can buy shares in Warren Buffett’s holding company, Berkshire Hathaway (BRK-B), for just over $200 per share.  If you buy even one of those, you’ll instantly become a part owner of companies that it owns in whole or in part:  Apple, Dairy Queen, Bank of America and Wells Fargo, American Express and Visa and MasterCard, Kraft Heinz, Costco, and many more.  So sometimes buying one stock can spread your money across a lot more than just one company!

If $200 per share is still too much for you, there are several great companies worth far less than that.  Maybe you can find a company for less than $40 per share that could become a ‘future Amazon?’  I will discuss where to find stocks to buy in the next post.

Why buy stocks?

There’s a whole lot more that I could add to what I’ve written, but these are subjects for future posts.

As you’ll learn, I love stock investing! It has rewarded me very well in recent years, ever since I finally figured out what it’s supposed to do versus what it’s NOT supposed to do – plus who it’s meant for versus who it’s NOT meant for (see below).

But if there’s one key statistic that sold me on the power of stock investing, it was in an article by The Motley Fool (more about them in the next post) after I had already been investing in stocks for a few years.  In other words, it greatly confirmed that I was on the right path by investing in stocks.

I can’t post a link to the article because it was written only for their Stock Advisor subscribers (their first and main stock recommendation service), but here’s the gist:  The Motley Fool did a study of all the things or “vehicles” that people could invest in and found stocks to be the long-term winner by a large margin – like an obscenely large margin.

Specifically, after a period of several decades, a portfolio of stocks in quality companies will absolutely destroy the returns that one would otherwise get through owning bonds, mutual funds, ETFs (exchange traded funds), real estate, and yes, even gold and precious metals.  In fact, the study found that investing in gold would have generated the worst return over the long-term despite the claims and protestations of the “gold bugs” of the investing world.  However, one caveat:  stock returns don’t really start to break away from the pack until after a decade or so has passed.  The point:  the real power of stocks lies in how long you hold them for.

Anyhow, over time, we’re talking about a potential multiplication of your investment money, not just a return of 20 or 50 or even 100 percent.  Think of the Amazon example above, which has rewarded the earliest investors who still hold AMZN shares with a return of THOUSANDS of percent – or even newer investors like me with returns of a few hundred percent only a few years in!

So, are stocks really for you?

Right now, some of you might be salivating and tempted to dance in the streets.  You’re thinking that if you could just find the right company, a $1,000 investment could be worth hundreds of thousands down the road.

However, I hope that I haven’t gotten your hopes up too much.  As with everything, you need to be level-headed.  Indeed, there are some investors out there who have experienced what I just described, but it’s one thing to find a company like this and entirely another to have the guts and patience to hold its stock long enough to have it do so well for you.

Personally, my return in AMZN in a few short years has been phenomenal and I hold other stocks that have also multiplied in value.  Then I have the majority that have earned between zero and one hundred percent, and lastly a few dogs that are currently in the red.  Even the great Peter Lynch said that a stock portfolio where you’re making money on only 60 percent of your stocks is up there with the best investors of all time!  (However, all it takes is only one or two big winners to wipe out all losses in all other stocks AND produce a very healthy net return.)

I’m going to finally finish this post by “weeding” you out.  If you can’t with sincerity answer ‘yes’ to ALL of the following questions, then stock investing is NOT for you and your reading should end with this article.  Here goes:

  1. Is your mortgage (if you have one) your only debt?
  2. Are you able to set aside at least $100 per month or 10% of your net (take-home) income – whichever is greater – that you will NOT need for everyday expenses?  That is, at least $100 per month or 10% of net income that is ‘free and clear’ above what you need to live on?
  3. Are you planning on investing money that you absolutely do NOT need for at least the next 3 to 5 years?
  4. Are you prepared to live with the price of any one stock suddenly plunging in value by ten or more percent below what you paid for it, with the possibility that it might not recover before you need to access your money?
  5. Are you prepared to live with the value of your entire stock portfolio falling by ten or more percent, whether you’re ahead or not, with the possibility that it might not recover before you need to access your money?

Answering ‘yes’ to all of the above questions means that you might have what it takes to become a successful stock investor.  But as with anything, talk is cheap and only experience will reveal the real answers.

To end this post, I will quickly comment upon each of these questions:

  1. Your #1 priority needs to be paying off any non-mortgage debt.  If you’re thinking that investing in stocks will help you pay off your mortgage faster because you hope to earn a better return than your mortgage interest rate, then you’ve chosen the WRONG reason to invest in stocks.
  2. You need to feed you or your family and be able to pay all of your bills – including your mortgage payment – BEFORE investing any money, period.
  3. Stock investing is not a ‘get rich quick’ scheme; it’s a vehicle designed to ‘grow wealth slow.’  Frequent trading or trying to “time the market” does NOT build the kind of wealth that I’ve mentioned so far.  If you’re not willing to develop a long-term perspective (at least 3 to 5 years), then do not become an investor in anything.
  4. I’ve had individual stocks lose over 25% of their value in one day.  (NOTE:  this has also happened to the most successful companies in the history of stock investing.)  If I owned it long enough, then it stayed above what I paid for it, but I’ve owned some stocks that never recovered before I eventually sold them at a loss.  You absolutely need this kind of stomach and patience to be a stock investor because it WILL happen to you at least once.  Also, stock investing is not for you if you think you’ll have a panic attack (or a heart attack) on a typical trading day when a stock gains or loses two or more percent of its value.
  5. This sort of a market “correction” or “crash” happens every few years.  I’m not joking.  How will you react when (not if) this happens?

——————–

One last thing:  be sure to click the Follow button near the top of this page.  Next, click here to go to Stock Starter Series Part 2:  Finding Stocks to Buy.  See you then(?).

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